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Wealth Brief The Wealth Brief is brought to you by
Edition 3
Contact us Suite 1/36 Sunshine Beach road Noosa Heads, Queensland 4567 T: 1300 761 236 E: advice@insuranceChampions.com.au W: www.insurancechampions.com.au
IN THIS ISSUE The ATO are watching... could you be on their radar? Do life insurance companies pay claims Tax and estate planning Employees may be liable not you Car loans, what are your options Borrowing to invest Managing your home equity Client referrals Thank you again to everyone who has referred their family, friends and business associates. We really appreciate your support and confidence in us to give the referral. We are always looking to improve in the delivery of our services to you. We want to make sure you are getting what you want from us and would appreciate your feedback. If you have never thought about referring us to your friends and associates, please take a minute and consider if there is anyone you know who might be able to use and gain an advantage from our services.
The ATO are watching...could you be on their radar? Capital Gains Tax (CGT) Capital gains tax is a major focus of the ATO’s compliance program. In particular, the ATO is concentrating on the following areas: • Individuals and small businesses who do not report income from capital gains, particularly on the sale of shares and properties; • The threshold tests for the small business concessions, including the application of losses; • Capital gains tax reductions schemes. The Cash Economy The cash economy remains a high priority for the ATO. Industries under focus include restaurants, cafes and takeaways, taxis, bartering, building and construction, the adult industry, and clubs and pubs. Example - Restaurants, cafes and takeaways. In this industry, the ATO is looking at the following: • Restaurants that have not disclosed all their cash takings, with one focus being group bookings over the Christmas period. • The development of indicators, such as: - Cups of coffee per kilogram of coffee beans; - Kebabs to each kebab ‘loaf’; - The number of staff required for the number of tables; and - Drawings from a business to determine if the drawings are adequate to support the lifestyle and financial commitments of the individual.
Low Doc Loans Low doc loans are loans that do not require paperwork to prove income (the lending institution usually charges a higher rate of interest on these loans). The ATO has begun auditing a number of people where income disclosed to lenders of low doc loans is substantially higher than that disclosed in their tax returns. The ATO is matching details from a selected range of low doc loans with the borrowers’ tax files. Work Related Expenses The ATO continues to conduct audits on work related expense claims. In particular the ATO is checking that the following claims are correctly calculated: • Self-education expenses • Car expenses (D1) • Home office expenses (D5) • Decline in value (D5) Ensure that you have kept the appropriate documents to substantiate your work related expense claims and that you can produce the documents if selected for a review.
Do life insurance companies pay claims? This enormous amount would not be paid if it wasn’t for all the work that is done by advisers. They help protect families, their assets and businesses from the financially devastating effects of illness and injuries. Product
$ Paid
In 2006, 10 Australian insurance companies paid out a combined total in excess of 2 billion dollars. An average $8.13 million per working day was handed over to support Australians. These statistics are the aggregate from the following companies:
Term
1,024,604,999
TPD
214,616,065
Trauma
222,602,976
AIG
AMP
Asteron
Aviva
AXA
Income Protection
569,592,402
Comminsure
ING
MLC
Tower
Zurich
Total
2,031,416,442
IS IT TIME YOU REVIEWED YOUR COVER?
Bond...insurance bond – an alternative to managed funds An Insurance Bond (the Bond) is an investment offered by life insurance companies that combines the benefits of a managed fund with the security, taxand estate planning benefits of a life insurance policy. Unlike a managed fund, where investors pay tax on earnings at their marginal rates, the Bond is a tax-paid investment, because the tax on earnings is paid by the life office at the rate of 30%. It does not affect an investor’s personal income tax or annual tax return obligations, unless a withdrawal is made in the first 10 years. If the Bond is held for 10 years from the original investment date and subject to the 125% additional contribution rule, there is no personal tax impact on any withdrawals. The Bond is designed for investors seeking to invest tax-effectively in the longer term for themselves or for their children; those in higher marginal tax brackets wishing to minimize taxable income; and investors wishing to defer personal tax on investment growth to future years or
seeking certainty in estate planning and wealth transfer.
the death of the life insured, bypassing the estate and any potential challenges.
Whilst Bond earnings withdrawn within the first 10 years are usually included in assessable taxable income, the capital component of any withdrawal is free from personal tax. Additionally, there is a tax offset of 30% on the earnings, and this may be used to offset tax on other income.
A bond owner over age 16 can transfer Bond ownership to another party at any time. This may be done without any personal tax implications to the new owner (if transferred without consideration) whilst retaining the Bond’s tax status.
Withdrawals are also free of personal income tax in the event of death, disability, illness and financial hardship.
Talk to your financial adviser for more details.
Anyone aged 16 years (10-16 with parental consent) and over may own a Bond. The Bond may also be owned by multiple individuals or by a company or a trust. If the Bond owner is the life insured, the owner may nominate a beneficiary who can receive the Bond proceeds tax free upon
Employees may be liable not you Update your Employment Contracts If you are an employee and you do something wrong, who is to blame – you or your boss? The High Court was asked to look at this issue in Houghton v Arms [2006] HCA 59 (13 December 2006). The enterprising and trusting Mr Arms started a website auscellardoor.com.au. He sold products to independent wineries. Mr Arms hired WSA. WSA was engaged to set up the web site. Mr Student was “WSA’s Online project manager”. Mr Student introduced his fellow employee, Mr Houghton as the “guru of interactive website design and development”. The “guru” set up the credit card accounts. Five days before the website was due to open the guru worked out that he had made a mistake. The credit cards for all of the vineyards would not work as thought. The Fair Trading Act states: “A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.”
Were the employees at fault personally? Would they have to suffer the loss themselves personally? Mr Houghton and Mr Student, themselves were not business proprietors. Nevertheless, Mr Houghton and Mr Student, as mere employees did engage in conduct in the course of “trade or commerce”. Thus they were personally caught.
4. To protect your employees you should speak with your insurance adviser about extending insurances to front line employees (directors get the protection why not the employees?)
We use to think that only directors would be caught - then shadow directors, then senior management. Now it appears that even employees can be liable personally.
6. Ensure that the Employment Contract protects the company when the employees are acting outside the scope of their employment. Wording like this is in the Brett Davies Lawyers employment contracts and should be adopted:
Results 1. If the company is insolvent and the directors are gone then you can start hunting down employees to sue. 2. You can still attack the company and directors for innocent but misleading statements. 3. You can also sue the employees who made the innocent but misleading statements.
5. Extend Directors Deeds of Indemnity to other employees (so that the company stands behind the employers)
Indemnify and hold the Employer harmless if the Employee causes damage, harm or any negative impact on the Employer of any nature including financial loss, economic loss or reputation loss (or for any damages for which the Employer would be liable) by acting outside the lawful directions of the Employer, outside the scope of this contract; while not acting in the Employer’s best interests or acting on a frolic of the Employee’s own choosing. Brett Davies, Lawcentral.com.au
www.insurancechampions.com.au
Car loans, what are your options Hire Purchase Agreement
Key Features:
A Hire Purchase arrangement is an agreement to purchase a vehicle subject to payment terms to the finance company. You will automatically own the goods when you pay the final payment.
1. Term: The term of finance agreement can be from 1 – 5 years and must be in accordance to ATO Guidelines.
Key Features: 1. Term: The term of finance agreement can be from 1 – 5 years. 2. Residual/Balloon: You can choose to have a balloon payment as the last payment of your finance agreement. This balloon payment is usually between 10% - 40% of the cost price. A balloon payment allows for lower monthly payments and leaves you with more working capital to run your business. 3. Deposits: Deposits are optional. You may, however, choose to trade in an existing vehicle or put in a deposit to reduce the amount to be financed. This, in turn, reduces your monthly repayments. 4. Owner of the goods: The financier owns the goods (i.e – retains legal title) during the term of the agreement. You automatically secure ownership upon payment of the final installment. 5. Accounting benefits: The amount financed is inclusive of GST, however, your monthly repayments are not subject to GST. You can claim the interest component of all repayments.* The depreciation of the goods is fully tax deductible.* The goods you purchase become an asset that shows on your balance sheet for your business. The goods will also be a contingent liability until the end of the finance agreement. However you may be liable to pay fringe benefits tax * providing goods are used 100% for business purposes
Lease Agreement A finance Lease is a rental agreement, where the finance company purchases the goods for you and you rent it from them for an agreed monthly repayment. The finance company owns the goods at the end of the agreement. It is important to note that there is no option for you to purchase the goods either during or at the end of the agreement. However most finance companies will consider an offer from you to purchase the vehicle for the residual value at the end of the lease term.
2. Residual/Balloon: You must have a residual payment as the last payment of your finance agreement according to Australian Taxation (ATO) Guidelines. This varies between 25% to 65%. This amount usually represents the approximate value of the goods at the end of the lease. A residual payment allows for lower monthly payments and leaves you with more working capital to run your business. You may refinance this residual value at the end of the contract (depending on the finance company). 3. Deposits: Deposits are not required. The full purchase price must be financed. 4. Owner of the goods: The finance company retains legal title during and after the term of the agreement. Legally, the vehicle should be returned to the finance company at the end of the term. The finance company will then auction the goods and you must pay for any shortfall between the sale price and the agreed residual value. However, in most cases, the finance company will usually consider your offer to purchase the vehicle at the agreed residual value at the end of the lease term. Title of the goods will then be transferred to you as the new owner. Accounting Benefits: The monthly rental payments are 100% tax deductible, provided the goods are solely used for business purposes. The amount financed is exclusive of GST (the finance company covers this cost as they are purchasing the goods for you). The monthly rental payments are subject to GST and stamp duty. The residual value and early termination are also subject to GST. The goods need to be shown on the balance sheet as both an asset and liability. However you may be liable to pay fringe benefits tax.
Chattel Mortgage A Chattel Mortgage or Bill of Sale arrangement is a loan agreement similar to a standard consumer loan (i.e – you are not hiring the goods or leasing the goods from the finance company, you OWN them). You borrow funds to purchase the car / vehicle and provide security for the loan by way of a mortgage over the goods. A Chattel Mortgage, unlike a lease or Hire
Purchase Agreement, gives you immediate ownership of the asset from the beginning of the loan. Key Features: 1. Term: The term of finance agreement can be from 1 – 5 years. 2. Residual/Balloon: You can choose to have a balloon payment as the last payment of your finance agreement. This balloon payment is between 10% - 40% of the cost price. A balloon payment allows for lower monthly payments and leaves you with more working capital to run your business. 3. Deposits: Deposits are optional. You may, however, choose to trade in an old vehicle or put in a deposit to reduce the amount to be financed. This, in turn, reduces your monthly repayments. 4. Owner of the goods: Ownership remains with you throughout the term of the loan. However, the vehicle is mortgaged to the finance company. The mortgage is discharged after the final payment has been made and you retain the equipment. 5. Accounting benefits: You can elect to pay the GST portion of the invoice price from working capital or fund it as part of the loan amount (the loan can be structured so that when the income tax credit is received, from your next BAS lodgement, it is repaid off the loan to reduce the debt). The interest components of all repayments are fully tax deductible.* The depreciation on the goods are fully tax deductible.* The goods you purchase will not show as an asset or contingent liability on the balance sheet for your business. A Chattel Mortgage attracts added upfront fees and varies between the different finance companies. However you may be liable to pay fringe benefits tax. * providing goods are used 100% for business purposes
Sale & Lease-Back or Sale & HireBack Quite simply, if you have purchased a vehicle for cash, but for whatever reason would now like to have it financed, this is a great option. Essentially, the finance company will purchase the vehicle from you and lease it back to you via a Finance Lease. The major advantage is that you get a return of your working capital (cash) to you or your business..
Borrowing To Invest Gearing is just borrowing money to invest, whether it is in a property, a share portfolio or any other investment. There are generally two types of gearing one of which is negative gearing which means your borrowing costs (interest & Fees) exceed the income you receive on the investment. The other is positive gearing where your borrowing costs (interest & Fees) are less than the income you receive from the investment. Gearing, can help you accumulate wealth faster by investing someone else’s money in addition to your own. This is because you benefit from the greater growth of a larger investment.
Gearing in the Share Market Gearing increases the returns of an investment, whether they are losses or gains. When you use gearing, you increase your gains when your investment rises, but also increase your losses in a falling investment. If this occurs you may be required to pay back part of the loan or provide extra security. This is usually referred to as a margin call. A margin call happens when the price of the shares fall below a level that would cover the lender’s loan to you. If you fail to pay the margin call, your shares will be forfeited to the lender, who will sell them to recover their money.
Advantages of Gearing
How Do You Manage The Risks
You can increase the potential profits
1. Put some money aside just in case a margin call arises
If you borrow money to invest in shares, and they increase in value, then you get the benefit of that capital gain when you sell the shares. You also get the benefit of any dividends or bonus share issues that may be made by the company while you own the shares. Using negative gearing for a tax benefit Negative gearing is when your borrowing costs (interest & Fees) exceed the income you receive on the investment. The difference between the two amounts is usually a deduction on your taxable income.
Disadvantages Of Gearing Increasing risk Gearing an investment will exaggerate any gains and losses due to the costs associated with borrowing money over and above any investment returns. Rising interest Rates This can place further pressure on your finances causing an increase in your repayments on the loan.
2. Invest in a diversified portfolio. 3. Borrow “Gear” at a level lower than the maximum amount allowed by the lender and manage this on a regular basis. 4. Pay the loan interest regularly. 5. Reinvest the income from the investment or credit it to the loan.
Are You Suited To Gearing Taking into account you’re financial and lifestyle situation over the next three to five years. Are you prepared to use some of your salary to pay the interest when the income from your investment cannot cover the interest repayments? Will you be able to ride out the peaks and troughs of the market, Will you have the ability to have keep some money aside in the event of a margin call arising and do you have the commitment to the geared investment throughout that time. There are many factors to consider when gearing to invest in the stock market or managed funds. It is best to get financial advice from your financial planner ensuring you receive the best outcome for your personal situation.
Managing your home equity A Home Equity Loan can be a powerful tool to build your wealth. Here is an example to show you how: Michael and Denise purchased their home in 1995 for $220,000 with a mortgage of $180,000. By 2001 the house had increased in value to $320,000 and they had reduced their mortgage to $160,000, giving them equity in their home of $160,000. At that time they borrowed a further $80,000 against the value of their home, as a deposit on an investment property. Over the coming years the value of both properties increased giving them a combined equity now of $320,000.
When recently reviewing both loans with their mortgage broker, Michael and Denise discussed using their equity for further investment. However, with some economists suggesting house prices may remain flat over the next few years, they decided they should diversify their investments. Their mortgage broker referred them to a licensed financial planner who designed a portfolio of Australian and overseas shares funded by a further tax-deductible loan of $100,000. By building an investment portfolio, Michael and Denise are now comfortable that they are well on their way to meeting their future objectives of funding their children’s secondary education and growing their own retirement nest egg. When setting up a home equity loan there are four important points to remember:
• Obtain professional assistance to choose the most appropriate loan and to structure it to ensure the interest is tax deductible. • Obtain professional assistance to set up a diversified investment portfolio suitable to your needs. • Only borrow an amount that still leaves a comfortable margin if house prices fall or there is a change in your circumstances. • Make sure you have Income Protection & Life Insurance cover in the event of serious illness, accident or death. Your advisors working together can develop a tailored mortgage, insurance and investment plan to suit your individual circumstances.
Disclaimer The information in this newsletter is of a general nature and is provided for illustrative purposes only. It is not intended to constitute advice of any kind. The information has been prepared without taking into account the objectives, financial situation, needs or circumstances of any particular person and should not be relied upon. You should not act on the information, rather it is designed for you to contemplate whether you should obtain professional advice if an issue may be of relevance, having regard to your objectives, financial situation, needs and circumstances. Authorised representative no 282461 of AAA Financial Intelligence Ltd AFSL: 312478
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